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Hepatitis C Commercial Game Theory

Anyone either celebrating or fearing the start of a Hepatitis C drug price war should take a break from the excitement to consider that a far more nuanced and profound game is at hand, one where the rules of tacit collusion (the legal kind) constrain price erosion—and each new entrant with a “good enough” drug regimen can take a reasonable share with modest further discounts.

In this game, in which patients can be cured even if they are not taking the most convenient or best tolerated regimen, being the best is not particularly relevant. It takes many qualifying entrants in the market before “gentlemanly” conduct turns chaotic and prices fall rapidly, a process that can be slowed by consolidation.

AbbVie’s (NYSE: ABBV) Viekira Pak, a combination regimen that was just approved by the FDA to treat chronic hepatitis C virus (HCV) infection, emerged with a list price only 10 percent lower than the $94,500 list price for 12 weeks of Gilead Sciences’ (NASDAQ: GILD) sofosbuvir-ledipasvir combo pill (Harvoni), though some patients only need to take Harvoni for 8 weeks. Although AbbVie and Gilead offer regimens with comparable cure rates, AbbVie’s is less convenient and less tolerable for the patient than Gilead’s: Viekira Pak requires more frequent dosing, involves more pills, has more complex drug-drug interactions, and has more side effects than Harvoni.

Despite the disadvantages of its regimen, AbbVie just secured exclusive formulary status from the pharmacy benefit manager Express Scripts (NASDAQ: ESRX) that covers tens of millions of patients in the U.S. In the deal, Express Scripts negotiated an undisclosed discounted price for Viekira Pak. By effectively removing Harvoni from the formulary, Express Scripts is forcing physicians to choose an inferior, yet “good enough” regimen. Thus, one important lesson from the AbbVie-Express Scripts deal is that the bar for qualifying as a new entrant in HCV is not as high as people think. Regimens that match or exceed the profile of AbbVie’s Viekira Pak are also “good enough,” and should be able to compete on price.

The rules of civilized price competition dictate that AbbVie can only offer a winning price discount to some payers, but not all, giving it only some of Gilead’s market share. In turn, Gilead has to let it happen. If Gilead cuts its price to take back the share it will lose to AbbVie, that would only trigger another round of discounting, cascading into a much anticipated price war.

In a kind of “ultimatum game,” Gilead must yield some market share to AbbVie to keep AbbVie from dropping its price further. Likewise, AbbVie cannot try to grab Gilead’s entire market share, or Gilead will respond with price cuts of its own. Predicting the fraction of the market each company will end up with is difficult, but a 50/50 split is unlikely. AbbVie may be content with less, especially since it likely wants to preserve pricing until it brings its more competitive next-generation regimen—which would likely still be a bit worse than Harvoni—to market. Were the U.S. a single-payer system, like the U.K., dividing the market would be impossible. But the U.S. is a fragmented market with a few large formularies (Express Scripts and CVS Caremark) and several medium and small ones; therefore, Gilead and AbbVie can split the market in a “gentlemanly” fashion. This phenomenon of neither player wanting to spark repeated rounds of discounting is called “tacit collusion,” and it is legal. The practice would only potentially violate anti-trust laws if the players communicated and coordinated their pricing plans.

The emergence of additional players in the HCV market, like Bristol-Myers Squibb and Merck possibly in 2016 or 2017, will force Gilead and AbbVie to make room for more new entrants. To compete, Bristol and Merck do not need to have the best drugs; they just need to be “good enough” (i.e., well-tolerated, oral dosing for 12 weeks or less, with greater than 90 percent cure rates). Each company’s debut may trigger a single round of discounting to establish the new market share equilibrium, but each party will do its best not to accidentally over-elbow the others into a frenzy of price discounts. Based on what is known about their compounds, Merck’s regimen could be comparable to Gilead’s, requiring only 8 weeks of dosing for most patients, while Bristol’s regimen may be more like AbbVie’s, requiring 12 weeks of dosing. All, though, should fall within the “good enough” spectrum.

Others are coming. Achillion Pharmaceuticals (NASDAQ: ACHN) is a small company with four HCV drugs in clinical development; it is working on a combination regimen that could come to market by 2018, maybe a year behind Merck. Even if all known HCV patients sought treatment today, due to capacity constraints and the large pool of undiagnosed patients, there will still be millions of people who need treatment in 2018. That makes HCV a substantial and long lasting market worth fighting for. And that’s even if treatments are priced at a half, or a third of the cost they are today—especially if, given the deflation expected to occur over the next few years, payers continue to drag their feet on enabling widespread access to treatments.

Therefore, by 2018, barring consolidation among these companies, there will likely be … Next Page »

Peter Kolchinsky is a founding partner and portfolio manager at RA Capital Management, a crossover fund investing in healthcare and life science companies. He received a Bachelor’s degree from Cornell University and a PhD in Virology from Harvard University. As noted above, one or more investment vehicles managed by RA Capital has positions in Achillion and Regulus. Follow @

17 responses to “Hepatitis C Commercial Game Theory”

As a specialty pharmacist, I have to deal with two barriers before I can dispense these new oral Hep C medications to patients: obtaining a prior authorization from the PBMs and then getting their copays covered. This article gave me a road map of what might lie ahead in terms of pricing. Interesting insights.

In light of what has happened since the first shots were fired, what is your reactions to the Hep C Price War where GILD has clearly signaled that it will defend its market share. Did GILD over-react? Was ABBV too aggressive in pursuing additional market share post Express Scripts. Really enjoyed your article. Go Big Red. This comment is for the author)

Indeed, that would be interesting; I’m looking forward to the data. However, the game probably doesn’t change as much as you would think. In the game of “good enough cure”, being the best isn’t as relevant as the Hippocratic Oath would suggest. Price would still matter. Once a company like Abbvie gets into the “good enough” zone, there is little risk of being cut out of the competition entirely because, if push comes to shove and you have nothing to lose, you just drop price until payers can’t ignore you. That being said, once you get low enough, price cuts below that may not matter. I don’t know what “low enough” is, however. If a one-shot cure cost $20k and everyone wanted it, leaving all companies even with all-oral 6-week regimens with zero market share, would Express Scripts give one of them exclusive formulary status if they dropped their price to just $10k? What if one-shot were $10k and an all-oral dropped price to $5k? That’s billions in savings. Ultimately, everyone still gets cured and taking one pill a day for 6 weeks is not that inconvenient. So even a company with a one-shot cure would have to play by the rules of “tacit collusion” and merely compete for some market share but leave enough for the other merely “good enough” players to feel satisfied so they don’t cut price further. So the article doesn’t get upended… it merely gets extended along the same lines.

However, in emerging healthcare markets where complying with a 6-week regimen is hard, a one-shot cure would be very important; that’s a very low price, high volume game, totally different from US/EU/Japan markets we’re used to thinking about. That’s a whole other article.

And don’t forget that this one shot cure may potentially have continuous efficacy for 150 days or more. I do believe that one shot and walk away tilts the hand it benitec’s favor, but even more so is that if it works the way they are thinking, it will cover most, if not all, genotypes.

I believe that you are referring to the idea that an AAV vector should continue to express the shRNA payload indefinitely (Factor VII has been shown to express for years) and therefore may protect patients from being reinfected. That is a cool feature, even if reinfection happens at a very low rate, and would need to be proven in studies, but by the time they are nearing the market, I think we’ll have data on the rate of reinfection among patients who had been cured with standard regimens. I think that many of the patients cured in the past with interferon-based regimens were relatively responsible patients who were compliant with fairly onerous treatments, possibly not as prone to HCV reinfection as some at-risk patients (IV drug users who can’t be bothered to use clean needles, customers of tattoo parlors that reuse ink). However, new oral regimens might be used to treat more of the at-risk patients, and so maybe we’ll see a higher reinfection rate. In any case, this was an article that touched on most of the drugs for which we have clinical data. There will be opportunities to discuss new agents down the road when they yield data.

Why reveal the Ace in their hands? If Benitec blows the lid off Hep C, guess who has an edge over investment timing. Additionally, TT-034 will also confirm the whole platform tech. Shhh. Don’t tell anyone. ;-)

In the light of a) improving “good enough” therapies or achieving the “good enough” and b) triple or quad therapies to improve barriers to resistance:

Do you see a commercial value in an DAA with only 1-2 log 10 reduction, but with a different resistance profile than other agents on the market/in P2/P3 studies and achieving this reduction relatively fast (within the first two days)?

Such an agent would be of questionable value in the hands of a standalone company, but if safe and incorporated into, for example, BMS’ regimen, might help BMS make its 12-week regimen into a more competitive 8-week regimen. But adding a fourth drug to a triple therapy is not straightforward and would cause delays that I doubt would justify the trouble. So my guess is that the big players would not bother with such a drug. 1-2 logs might just be too little too late.

May-be 94K to cure Hepatitis C is the real issue (and don’t give that crap about drug development, 10 years, 1 billion….blah, blah, blah). I get the economics but the slick breakdown is just so disgusting. I can’t stomach it.